This announcement contains inside information

 

15 September 2022

 

THG PLC

 

Interim results for the half-year ending 30 June 2022

 

 

Substantial progress as we continue to build a strong, sustainable global platform supporting THG brands and Ingenuity clients

 

Record revenue performance of £1.1bn in H1, underpinned by stable customer behaviour metrics driving market share gains in large Beauty and Nutrition markets

 

Adjusted EBITDA of £32.3m, with operating loss of £89.2m reflecting consumer price protection investment strategy. Medium term guidance reiterated with cost efficiencies and commodity price improvements supporting margin recovery in H2 and 2023

 

Robust cash on hand of £266m plus undrawn £170m RCF. £156m credit approved banking facility and agreed disposal of £44m non-core freehold asset will further strengthen the Group's balance sheet

 

Governance progress with appointment of experienced independent non-executives

 

 

THG PLC ("THG" or the "Group"), the proprietary technology platform specialising in taking brands direct to consumers ("D2C") globally, announces its interim results for the half-year ending 30 June 2022 ("H1 2022").

 

 

H1 2022 Group Trading Performance

£m	H1 2022	H1 2021	YoY1 Growth		YoY Growth CCY2		2 Year Growth		2 Year Growth CCY
THG Beauty	552.8	460.8	+20.0%		+17.7%		+87.0%		+90.4%
THG Nutrition	332.1	328.4	+1.1%		+3.3%		+28.7%		+34.8%
THG Ingenuity	104.2	85.8	+21.4%		+20.2%		+69.5%		+72.4%
THG OnDemand	51.0	51.6	-1.0%		-1.9%		+44.2%		+47.1%
Other	36.7	32.2	+13.4%		+12.4%		+45.2%		+46.5%
Group Revenue	1,076.8	958.8	+12.3%		+11.9%		+59.4%		+64.0%
Gross Margin %3	42.1%	46.5%
Adj EBITDA4	32.3	81.2	-60.2%
Adj EBITDA%	3.0%	8.5%
Adj EBITDA pre SaaS costs5	36.1	81.2	-55.5%
Adj EBITDA% pre SaaS costs	3.4%	8.5%
Adjusted items	22.9	28.6	-5.7
Operating loss6	-89.2	-17.4	-71.8
Net Debt / Cash7	-225.6	384.6
Ingenuity Commerce Revenue	22.9	18.3	+25.1%		+25.1%		+232.3%		+232.3%

 

 

Half-year 2022 financial highlights

·     Group revenue of £1.1bn, +12.3% YoY and +64.0% two-year growth (CCY). Lower growth rate vs prior period reflects lockdown comparatives and market uncertainty across consumers and corporates linked to macro-economic events. Beauty the key driver at +20.0% reflecting, in part, the impact of the Cult Beauty and Bentley Labs acquisitions.

·     A strong customer acquisition and retention engine has powered growth in Beauty and Nutrition active customers by >110% vs H1 2019, supporting high customer repeat rates which account for around 80% of D2C revenue across Beauty and Nutrition.

·    Over 10 million app downloads8, with app customers representing 11.4% of Group D2C H1 2022 revenue (H1 2021: 5.1%). Greater app participation has partially mitigated rising marketing costs, with customers acquired at lower costs through this channel typically ordering more frequently, with higher average order values 'AOV's' due to regular engagement.  

·    The UK is a major territory within Beauty and Nutrition markets globally. THG's UK revenue grew in excess of the Group rate in H1 2022. US participation at 20% reflects the successful integration of Dermstore and double-digit growth in Nutrition.

·    Reduced gross profit margin at 42.1% (H1 2021: 46.5%) primarily reflects the strategy to partially shield consumers from adverse macro-economic conditions and a period of unusually high raw material costs (principally whey). This investment is driving customer retention and underpinning future growth.

·   Automation, strong cost control and efficiencies across the Group's global warehouse and fulfillment network delivered a 100bps distribution cost reduction9 YoY and improved customer delivery, notwithstanding significant cost inflation across global logistics.

·      Increased administrative costs reflect temporary investment in headcount primarily following the acquisitions made in the prior year, plc governance costs, and industry wide marketing cost per click inflation.

·      Adjusted EBITDA of £36.1m (H1 2021: £81.2m) before £3.8m charge from adoption in H1 2022 of the IFRIC covering SaaS costs, leaving reported adjusted EBITDA of £32.3m. This earning reduction is mainly driven by the stated strategy to limit the consumer pass through of commodity cost increases to prioritise retention and growth in the global customer base.

·      The Group incurred an operating loss of £89.2m impacted by certain non-recurring costs, which continue to reduce (20.0% YoY):

o  £11.3m of incremental international delivery costs, predominantly in Asia, due to the absence of traditional delivery routes and elevated costs

o  £2.1m of Distribution costs relating to the commissioning of purpose-built new fulfillment facilities

o  £9.5m of Administrative costs (principally related to the divisional reorganisation and acquisition integration costs).

 

 

1 YoY defined as year-on-year statutory sales growth

2 CCY defined as constant currency basis

3 Gross Margin % is presented before the impact of depreciation and amortisation

4 Adjusted EBITDA is defined as operating profit before depreciation, amortisation, share-based payments and adjusted items

5 To remove Software-as-a-Service costs "SaaS" which have been recognised within administrative expenses in H1 2022 following the IFRIC agenda decision. Presentational change with no incremental change to cashflow

6 See CFO report page 10 for a reconciliation to adjusted EBITDA

7 Net (Debt) / Cash is cash and cash equivalents less debt before lease liabilities, on a hedged basis (see note 7)

8 Number of mobile apps downloaded since launch in 2020

9 100bps reflects the reduction in distribution costs as a percentage of revenue

 

 

Balance sheet and cash

·    Cash on hand of £266m and an undrawn £170m RCF at the period end. A net working capital outflow in H1 is typical, with an additional c.£75m one-off cash investment principally for inventory in the new warehouse facilities and accelerated supplier payments in H1 2022. With seasonal peak trading ahead, H2 2022 is expected to be cash generative as in previous years, with inventory lower at the year-end vs prior year.

·     Year-end cash of c.£500m expected, including completion of credit approved three-year term £156m banking facility and non-core freehold asset disposal (£44m)10.

·   Following significant investment in its global infrastructure network and through ongoing project delivery efficiencies, the Group anticipates capex in FY 2023 of c.5.0% of revenue.

·    The Group therefore remains on track to becoming broadly free cash flow neutral in FY 2023 and significantly free cash flow positive in FY 2024.

 

Illustrative cash items	FY 2022	FY 2023
Working Capital	Neutral	Modest inflow
Adjusting Items	c.£60m	c.£15m - £20m
Capex (net of disposals)	c.£150 - £160m	c.5.0% of revenue
Financing and Tax	c.100m	In line with 2022
Free Cash Flow	Negative	Broadly neutral

 

 

¹⁰ See CFO report page 13

 

Matthew Moulding, CEO of THG, commented:

"I'm proud to report the Group achieved record H1 revenues of £1.1bn, delivering +12.3% growth against a challenging global backdrop, alongside a strong prior year performance during lockdown. The Group continues to deliver significant infrastructure development, which in turn has supported market share growth through improved localised service as well as substantial operational savings. The first half of this year saw continued strong customer metrics, with active Beauty and Nutrition customers now 113% higher on a three-year basis.

 

"Our highly engaged, global customer base, with high repeat rates, is a key asset of the business. Recently achieving 10 million app downloads from launch in early 2020, further strengthens the Group's relationship with consumers and our first party data advantage.

 

"Against the tough macro-economic backdrop, we have prioritised our loyal customer base, over maximising near term gross margins focusing on retention and growth of consumers. The strength, resilience and agility of our vertically-integrated business model, coupled with automation, has enabled us to significantly invest in price protection for consumers currently facing unprecedented cost-of-living challenges.

 

"Supporting our consumers through 2022 has been offset through reducing 2023 capex, with the Board viewing this investment as yielding a better return for shareholders and consumers alike in the near term. 

 

"With a strong balance sheet and category leading positions within substantial end markets that continue to benefit from long-term structural growth, we have confidence in our ability to deliver long-term value for shareholders and remain on track to be cashflow positive in 2024."

 

 

Continued substantial strides towards building strong global consumer brands

·    As pandemic restrictions have lifted across most of the world, consumers are welcoming the return to normality, creating increased usage occasions, despite inflationary pressures.

·     Continued demand from highly engaged customers with over one billion visitors to the Group's websites during the last 12 months and a 16 million strong social media community supporting AOV's (THG Beauty +7% YoY, THG Nutrition +9% YoY).

·    THG Beauty has doubled in size since the IPO, including a 50% increase in brand partners and successfully integrating US based Dermstore and Cult Beauty in the UK. The addition of Bentley Labs in the US in June 2021 enhanced the Group's new product development and production capabilities within North America, providing a faster product development platform to THG's own beauty brand portfolio.

·    The Nutrition division continues to expand into adjacent markets through localisation and category expansion, with innovative new product ranges supporting growth in active customers by 69% vs H1 2019.

·     The recent US launch of the 'Whey Forward', an animal-free whey protein alternative emphasises the advantages of a vertically-integrated model in delivering sustainable solutions whilst mitigating exposure to commodity costs.

·   Collaborating with major brands and influencers continually raises brand awareness, with Myprotein recently agreeing to enter the frozen category through a major licensing partnership with Iceland Foods initially through >1,000 stores in the UK, international franchises and online.    

·      The divisional reorganisation gives each division maximum strategic optionality moving forward.

 

THG Ingenuity update

·    Despite capital hesitancy across enterprise and SMB clients against an inflationary macro-economic backdrop, the long-term outlook for e-commerce penetration remains very positive.

·     Ingenuity is now firmly endorsed as the partner to deliver digital growth ambitions for enterprise clients with 44% of 2020 clients adding more services, and over 70% of live sites operating in major territories, supported by a >30% expansion of the global logistics network.

·    7 out of the top 20 food and beverage brands are now partnering with Ingenuity, demonstrating its multi-category reach (including General Mills, Mondelez International, Kraft Heinz, Nestle and Coca-Cola European Partners).

·    Average recurring revenue per website and Annual Revenue Run-Rate in Q2 2022 broadly in line with prior quarter (£0.16m), with seasonal uplift in Gross Merchandise Value processed over the peak trading period elevating the Q4 2021 position.

 

	Q2 2022	Q1 2022	Q4 2021	Q3 2021	Q2  2021
Number of live client websites11	212	202	187	163	133
Average recurring revenue per website12 (£m)	0.16	0.16	0.24	0.17	0.17
Recurring Revenue %13	76%	76%	72%	59%	55%
Annual Revenue Run-Rate14 (£m)	49	51	61	44	37

 

·   Growth strategy remains; i) New customer growth within FMCG, food and beverage, and retail categories, ii) Expanded share of commerce spend from existing clients, and iii) Deployment of productised solutions across fulfilment, fraud detection and digital media & content.

·   New CEO of THG Ingenuity, Vivek Ganotra, who joined the Group in Q2 2022, brings significant experience in technology, operations and digital commerce from previous roles at Salesforce (Chief Customer Officer, UK) and British American Tobacco over the last 20 years.

 

 

¹¹ Number of websites defined as website with a specific domain name/URL live at the end of the period

12 Average recurring revenue per website is presented on an annual basis

13 Based on total Ingenuity Commerce revenue

14 Annual Revenue Run-rate is based on annualised recurring revenue in the quarter and trailing 12 months non-recurring revenue

 

Corporate Governance

The Group's intention to step-up to the Premium segment of the Main Market of the London Stock Exchange remains, with timing subject to the outcome of an FCA review for reform of the listing regime expected in 2023.

 

In a separate announcement today, the Board has also made changes to its composition.

 

FY 2022 outlook and guidance

·   Earlier this year, the Board set out growth plans for the Group to deliver FY 2022 revenue growth of +19.0% to +24.0% (c.1.0% impact from Russia and Ukraine market exits), with adjusted EBITDA broadly in-line with prior year (FY 2021 £161m).

·    Whilst H1 revenue growth of +12.3% and stable consumer metrics gives us confidence for H2 sales growth, the cost of rising interest rates and energy are expected to place pressure on consumers.

·   Despite this outlook, the Group anticipates a strong H2, with another period of double-digit growth. This performance is expected to be supported by increasing growth rates in both Nutrition and Ingenuity, comparatives easing, stable AOV's, new customer acquisition and repeat rates.

·     Pricing power across THG's own brands allows inflation to be partially mitigated through increased prices, albeit the Group remains committed to raise slower and lower than inflation to protect consumers and drive market share gains.

·    Whilst inflation is easing in core areas such as commodities, the majority of margin benefits will be realised in the fourth quarter due to forward buying plans. Therefore the Group now expects FY 2022 adjusted EBITDA between a range of £100m to £130m pre SaaS cost reclassification reflecting:

o  Revenue growth of +10.0% to +15.0%;

o  Stated strategy of raising prices at a lower rate to underlying input costs to drive retention and market share gains;

o  Incremental energy cost inflation, weighted to the second half due to phasing of market price increases;

o  c.£8m of SaaS costs (see footnote 5).

·   Cash adjusting items continue to reduce, reflecting final phases of warehouse commissionings and acquisition integrations, underpinning an expected c.50% reduction in H2 vs prior year.

 

FY 2023 and medium term outlook

·     Global economic forecasts predict the outlook for consumers will remain challenging. Online penetration of beauty, health and wellness markets is c.25% globally, and we expect continued long-term channel shift as lockdown comparatives fall away. This is supported by data insights as to the behaviour of recently acquired customer cohorts across the business.

·     Medium term constant currency revenue growth guidance of between +20.0% to +25.0% is reiterated, confidence underpinned by track record of outperformance and market share growth.

·   The Board remain confident of a return to 9.0%+ adjusted EBITDA margins in the medium term, and strong progression into FY 2023 through:

o  Operating leverage;

o  Gross margin recovery as the consumer price protection strategy in H1 2022 normalises over the next 24 months, largely driven by lower average whey input prices;

o  Over £30m annualised impact of infrastructure, procurement and payroll efficiencies, largely identified and delivered through the Group's divisional reorganisation; and

o  A strong Ingenuity pipeline and continued endorsement of the proposition through; i) an expanded enterprise client base, ii) new vertical penetration, and iii) further share of digital spend from existing clients.

 

 

Analyst and investor conference call

 

THG will today host a conference call and webcast for analysts and institutional investors at 9.00am (UK time) via the following links:

 

To register for the webcast, please use the below link:

https://stream.brrmedia.co.uk/broadcast/62fa5b12b629a70556525263

 

To ask questions, you must dial in via conference line using the below details:

·      Confirmation code: 3361798

·      UK dial in: +44 (0)800 279 6877

·      US dial in: +1 800 289 0720

 

A playback of the presentation will be available on THG's investor website at www.thg.com/investor-relations later today.

 

For further information please contact:

 

Investor enquiries - THG PLC
Kate Grimoldby	Investor.Relations@thg.com
Media enquiries:
Powerscourt - Financial PR adviser	Tel: +44 (0) 20 7250 1446
Victoria Palmer-Moore/Nick Dibden/Nick Hayns	thg@powerscourt-group.com
THG PLC Viki Tahmasebi	Viki.tahmasebi@thg.com

ENDS

Notes to editors

THG is a vertically integrated, digital-first consumer brands group, retailing its own brands in beauty and nutrition, plus third-party brands, via its proprietary, end-to-end, e-commerce technology, infrastructure and brand-building platform (THG Ingenuity) to an online and global customer base. THG's business is operated through the following businesses:

THG Beauty: The globally pre-eminent digital-first brand owner, retailer and manufacturer in the prestige beauty market, combining its prestige portfolio of eight owned brands across skincare, haircare and cosmetics, the provision of a global route to market for over 1,300 third-party beauty brands through its portfolio of websites, including Lookfantastic, Dermstore, Cult Beauty and Mankind and the beauty subscription box brand GLOSSYBOX.  

 

THG Nutrition: A group of digital-first Nutrition brands, which includes the world's largest online sports nutrition brand Myprotein, and its family brands (Myvegan, Myvitamins, MP Clothing and Myprotein Pro), with a vertically-integrated business model, supported by six THG production facilities.

 

THG Ingenuity: Ingenuity Commerce provides an end-to-end direct to consumer e-commerce solution for consumer brand owners under 'Software as a Service' (SaaS) licences. The wider Ingenuity division provides stand-alone digital services, including hosting, studio content, translation services and beauty product development and manufacturing.

 

THG OnDemand: Personalisation and customisation is a key offering within THG OnDemand, enabling brands to offer unique products to a vast range of consumers across THG's global territories through websites including Zavvi, IWOOT and Pop in a Box.

Other: Luxury D2C websites including Coggles, AllSole and MyBag, in addition to THG Experience. The latter comprises prestige events locations at Hale Country Club & Spa, King Street Townhouse Hotel and Great John Street Hotel, providing deeply experiential brand building environments, most notably in support of THG Society, the Group's proprietary influencer marketing platform.

 

 

Cautionary Statement

Certain statements included within this announcement may constitute "forward-looking statements" in respect of the group's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words and words of similar meaning as "anticipates", "aims", "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets", "goal" or "estimates". By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. No responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast. This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in the Company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser. Statements in this announcement reflect the knowledge and information available at the time of its preparation.

 

 

 

THG PLC

 

Interim results for the half-year ending 30 June 2022

 

 

Chief Financial Officer Review

The Group made substantial progress in the first half of 2022 against a challenging backdrop with half year revenue exceeding £1bn for the first time. The Group delivered an increase in revenue of 12.3% (11.9% on a constant currency basis), an encouraging performance given prior year lockdown comparatives and market uncertainty for consumers given the macro-economic environment. 

 

			Six months ended 30 June 2022					Six months ended 30 June 2021
				Before Adjusted Items	Adjusted Items	Total		Before Adjusted Items	Adjusted Items	Total
			£'000		£'000	£'000		£'000	£'000	£'000
CONSOLIDATED INCOME STATEMENT
Revenue			1,076,762		-	1,076,762		958,830	-	958,830
Cost of sales			(634,221)		-	(634,221)		(521,418)	-	(521,418)
Gross profit			442,541		-	442,541		437,412	-	437,412
Distribution costs			(186,495)		(13,418)	(199,913)		(171,912)	(15,566)	(187,478)
Administrative costs			(322,351)		(9,473)	(331,824)		(254,284)	(13,043)	(267,327)
Operating (loss)/profit			(66,305)		(22,891)	(89,196)		11,216	(28,609)	(17,393)
FINANCIAL SUMMARY: Adjusted profit measures
Gross profit (before depreciation and amortisation)			452,881		-	452,881		446,271	-	446,271
Distribution costs (before depreciation and amortisation)			(174,187)		(13,418)	(187,605)		(164,683)	(15,566)	(180,249)
Administrative costs (before depreciation, amortisation and share-based payments)			(246,375)		(9,473)	(255,848)		(200,373)	(13,043)	(213,416)
EBITDA			32,319		(22,891)	9,428		81,215	(28,609)	52,606
Depreciation			(45,732)		-	(45,732)		(28,554)	-	(28,554)
Amortisation			(52,319)		-	(52,319)		(41,445)	-	(41,445)
Share-based payments			(573)		-	(573)		-	-	-
Operating (loss)/profit			(66,305)		(22,891)	(89,196)		11,216	(28,609)	(17,393)

 

Note The table above shows financial results for gross profit, distribution costs and administrative costs before the impact of depreciation, amortisation and share-based payments, which are shown as separate lines below EBITDA. For statutory presentation, cost of sales includes charges of £10.3m (2021: £8.9m), while distribution and administrative costs include £12.3m (2021: £7.2m) and £76.0m (2021: £53.9m) of depreciation, amortisation and share-based payment charges respectively.

 

Revenue

Group revenues increased 12.3% to £1,077m (H1 2021: £959m) and 11.9% on a constant currency basis, culminating in 2-year total sales growth of 64.0% (constant currency). THG Beauty delivered the strongest growth at 20% year-on-year to £553m. THG Beauty sales represented 51% of Group sales (H1 2021: 48%).

Growth in the first half of 2022 included the contribution of several 2021 acquisitions including Cult Beauty and Bentley Labs.

3-year organic sales growth[15] (which normalises the impact of the pandemic) was over 60% in both THG Beauty, THG Nutrition and as a Group for H1, in line with medium term guidance provided at IPO.

THG Nutrition sales grew 1.1% year on year to £332m, with challenging commodity prices and FX providing headwinds, as well as a particularly strong comparative period due to online retail benefitting, in H1 2021, from the closure of physical retail stores. THG Ingenuity revenues grew 21.4% year-on year to £104m in the first half, with the Ingenuity Commerce division growing 25.1%.

International sales accounted for 57% (H1 2021: 59%) of total Group revenue. US businesses Dermstore and Bentley were acquired in February 2021 and June 2021 respectively and have now annualised and, along with the double digit international sales growth in THG Nutrition, contributed to the 20% US sales participation for the Group in H1 2022. The UK delivered sales growth in excess of the Group growth rate reinforcing our strong position and continued consumer demand in one of our core markets.

Ingenuity Commerce revenue of £22.9m (H1 2021: £18.3m) includes recurring revenue of 76% (H1 2021: 55%). Recurring revenue includes Software-as-a-Service (SaaS) licence fees, monthly brand building fees, infrastructure service fees, revenue share and a number of additional services such as translation and creative services. The strong recurring revenue participation growth illustrates the strength of the underlying model, with non-recurring revenue impacted by clients' capital hesitancy given the macro-economic backdrop. Non-recurring revenue includes one-time technology fees covering the costs of the design and development of the website along with integration fees for bringing partners onto the Ingenuity platform. Whilst these are non-recurring on a site-by-site basis, we consider that such fees will be received in future periods as our clients expand their offering and as our technology offering continues to evolve.

 

15  3-year organic sales growth defined as the increase in revenue excluding all acquisitions made post June 2019

Gross profit

Gross profit increased to £443m from £437m with a margin of 41.1% (H1 2021: 45.6%) on a statutory basis. Gross profit (before depreciation and amortisation) was £453m equating to a gross profit margin of 42.1%, which was 440bps lower period on period.

In the first half of 2022, gross margin has been impacted by the many well-documented macro-economic factors impacting the markets in which the Group operates.  The environment in H1 2022 has been unusual with elevated commodity pricing (both commodity whey pricing, and other indirect raw ingredients), foreign exchange headwinds (principally Japanese Yen) and wider inflation following on from Covid-19 impact and subsequently the war in Ukraine. As management considers the majority of these headwinds to be transitional in nature, the Group has invested in margin, primarily in consumer price protection to protect the customer as much as possible, which is evident in the reduction in margin delivered.

 

Operating expenses

Distribution costs (before adjusted items, depreciation and amortisation) reduced as a percentage of sales by 100bps compared to H1 2021, culminating in a cost of £174m (H1 2021: £165m), which is 16.2% of revenue. This strong performance has been driven by the Group's investments in automation that have driven cost efficiencies across the global fulfilment network, including THG's first automated robotic (AutoStore) facility in Manchester. This reduction in distribution costs is against a market backdrop with many peers suffering the impact of inflationary pressures in fulfilment.

 

Administrative costs (before adjusted items, depreciation, amortisation and share-based payments) as a percentage of revenue, increased by 198bps period-on-period driven by several factors including one-time investment in governance and infrastructure investment that provides the foundations for future growth. The Group has also invested in payroll to support acquisition integration and to expand the Ingenuity Commerce offering, which will provide operational leverage over time. Marketing paid media costs have experienced well-documented inflationary pressures partially offset by technology focused marketing and the Group's influencer focused model.

 

Administrative expenses in H1 2022 also include £3.8m of costs relating to services rendered under SaaS arrangements following the IFRIC agenda decision. These costs were capitalised in the prior period, so provide a complete headwind period-on-period.

 

Adjusted EBITDA

Adjusted EBITDA fell to £32m (£36m pre SaaS costs) from £81m. This represents a margin of 3.0% (H1 2021: 8.5%) reflective of the challenging environment that we have seen in H1 2022 and the Group's strategy to, as far as possible, protect consumers from these inflationary pressures, FX, together with administrative cost inflation across payroll and marketing.

Adjusted EBITDA is an alternative performance measure, the below table reconciles back to the nearest appropriate GAAP measure, operating loss:

 

 

£'000			Six months ended 30 June 2022	Six months ended 30 June 2021
Operating loss			(89,196)	(17,393)
Adjustments for:
Adjusted items			22,891	28,609
Depreciation			45,732	28,554
Amortisation			52,319	41,445
Share-based payments			573	-
Adjusted EBITDA			32,319	81,215

Depreciation and amortisation

Total depreciation and amortisation costs were £46m and £52m respectively (H1 2021: £29m and £41m) an increase of 40.1% on the prior period, as THG invested £39m in intangible assets, primarily its proprietary technology platform during the period and £44m in its operations and state of the art warehousing facilities included commissioning of the Autostore. Depreciation charges increased period-on-period reflecting the full period impact of the right of use assets acquired from business combinations in 2021. Amortisation charges increased again reflecting the full period impact of the additional intangible assets that arose from the acquisitions in 2021. 

Adjusted items

In order to understand the underlying performance of the Group, certain costs included within distribution, administrative and finance costs have been classified as adjusted items. These items principally relate to acquisition-related restructuring and integration costs, transportation, delivery and fulfilment cost increases in relation to Covid-19. All material classes of adjusted items reduced period-on-period.

 

The largest cost included within adjusted items is transportation, delivery and fulfilment costs in relation to Covid-19. The excess cost continuing across accounting periods is driven by the continued lockdowns experienced in Asia which still affect air traffic and key shipping lanes. As the effects of the pandemic lessen and the lockdowns in Asia ease, the service providers will no longer need to charge such excess costs. In addition, integration costs of £6m were also incurred in relation to the 2021 acquisitions. Cult Beauty was acquired in August 2021 and the integration was a key focus of H1 2022. Restructuring costs relate to the separation of the divisional structure, with costs expected to decrease in H2 2022.

 

 

					Six months ended 30 June 2022	Six months ended 30 June 2021
					£'000	£'000
Within Distribution costs
Transportation, delivery and fulfilment costs in relation to Covid-19			11,332			12,687
Commissioning - new facilities			2,086			2,879
				13,418		15,566
Within Administrative costs
Acquisitions - legal and professional costs				-		7,578
Acquisitions - restructuring and integration				6,169		2,824
Restructuring costs				2,943		1,551
Donations		361				1,090
		9,473				13,043
Within Finance costs
Softbank option - non-cash				(601)		38,120
Total adjusted items before tax				22,290		66,729
Tax impact			(3,797)			(2,958)
Total adjusted items				18,493		63,771

 

                  For full details on each category of adjusted item see note 3 to the financial statements.

 

Operating loss

The Group incurred an operating loss in the period of £89m (H1 2021: £17m). The loss was as a result of the challenging macro-economic environment, underlying cost price inflation, commodity and foreign exchange headwinds.

Additionally, administration costs (before adjusted items, depreciation, amortisation and share-based payments) increased from 20.9% of revenue in H1 2021 to 22.9% of revenue in H1 2022 as explained earlier.

Operating loss before adjusted items totals £66m (H1 2021: profit of £11m). This decrease is due to the impact of the increase in costs and the stated strategy to limit the consumer pass through of inflationary pressures as set out above. This is consistent across the industries we operate in and management considers many of these costs transitional in nature. 

Finance costs

Adjusted finance costs have decreased to £20m (H1 2021: £26m) driven by a lower effective interest rate on the Group's principal debt, the €600m Term Loan B.

 

Statutory finance costs have decreased to £20m (H1 2021: £64m) which is driven by the former and the non-cash adjusted item relating to the valuation of the SBM option that has decreased from a charge £38.1m in H1 2021 to a credit of £0.6m at the end of the half year. The change in valuation is due to the option being revalued to £nil at 30 June 2022.

 

Loss before tax and tax rate

Reported loss before tax was £108m (H1 2021: £81m). The effective tax rate is 1.7% (H1 2021: -0.6%) generating a total tax credit of £1.8m (H1 2021: charge £0.7m). The effective tax rate differs from the average statutory rate of 19%. This is primarily due to a movement in deferred tax not recognised (-21.8%), the impact of the substantively enacted UK tax rate change from 19% to 25% on deferred tax (6.6%), and expenses not deductible (-1.2%).  The non-deductible expenses principally comprise of the share-based payments charge and costs included within adjusted items  associated with the group restructure exercise.

 At 30 June 2022, the total deferred tax liability is £71m mainly driven by the deferred tax in respect of previous business combinations of £142m. As a result, a portion of the deferred tax assets arising in the period of £78m can be recognised while £32m remains unrecognised at the balance sheet date. This deferred tax asset recognition has a material impact on the income statement tax credit and is the primary reason for the effective tax rate falling below the statutory rate. The income statement tax credit is a non-cash item.

 

Earnings per share

Loss per share was (£0.09) per share (H1 2021: £(0.08) per share). 

Balance sheet
Cash and cash equivalents and net cash before lease liabilities

		30 June 2022	30 June 2021	31 December 2021
		£'000	£'000	£'000
Loans and other borrowings		(502,099)	(504,019)	(489,865)
Lease liabilities		(363,805)	(318,352)	(349,173)
Cash and cash equivalents		265,661	878,549	536,827
Sub-total		(600,243)	56,178	(302,211)
Adjustments:
Retranslate debt balance at swap rate where hedged by foreign exchange derivatives		10,871	10,046	(2,548)
Net (debt) / cash		(589,372)	66,224	(304,759)
Net (debt) / cash before lease liabilities		(225,567)	384,576	44,414

 

The Group's balance sheet remains robust closing the period with cash balances of £266m (H1 2021: £879m, 31 December 2021: £537m). All debt facilities are long-dated, with the €600m Term Loan B maturing in 2026.

 

Net debt before lease liabilities and adjusted for the impact of hedging was £226m (H1 2021 net cash: £385m, 31 December 2021: net cash £44m). The reduction period on period is driven by the investment in property plant and equipment, leases and intangible assets in the period totalling £107m and working capital outflows totalling £156m which are expected in H1 with the seasonality of the business. 

 

The Group revolving credit facility of £170m remains undrawn.

 

The total cash outflow for the period was £271m (H1 2021: inflow £105m). This outflow is driven largely by working capital movements which generated a net cash outflow of £157m (H1 2021: outflow of £66m). A seasonal working capital outflow in H1 is typical for THG as the group settles peak stock purchases made in Q4 of the previous year. The Group then typically generates a working capital inflow in H2 with peak trading in the second half of the year. The cash outflow in H1 2022, was higher than that of the prior periods by c.£75m. This was principally driven by the one-off cash investment in stock build in Q4 2021 to stock new warehouses, whilst the Group has also accelerated supplier payments both by normalising payments on acquisitions and from internal process improvement, which has reduced creditor days.  The Group plans to exit 2022 with less stock than it held at the end of 2021.

 

As part of investing and growing the infrastructure of the Group and the distribution network, there has also been investment in property plant and equipment and intangible assets (primarily the Ingenuity platform) totalling a cash outflow of £87m (H1 2021: £90m). The expanded global distribution infrastructure and automation is delivering operating efficiencies during a substantial cost inflationary period, and further working capital improvements over the near-term.

 

In H1 2021, there was a cash outflow of £498m for acquisition of subsidiaries and £730m cash inflow from share issuance. Neither of these items recurred in H1 2022.

 

In September 2022, the Group entered exclusivity upon agreed terms for the sale of a non-core freehold asset16 for net cash proceeds of £44m. The Group is also credit approved to enter a new three-year term £156m banking facility provided by existing banking partners. This new facility is in addition to the Group's existing banking facilities.

 

Property plant and equipment and intangible assets

Property plant and equipment totalled £359m (H1 2021: £290m, 31 December 2021: £336m) with intangible assets including goodwill increasing to £1,558m (H1 2021: £1,213m 31 December 2021: £1,506m). The increase was driven primarily by additional investment in the THG Ingenuity platform and continued investment in the group warehouse expansion programme which is now nearing completion. These were offset by the depreciation and amortisation charges incurred.

 

Going concern

The Group remains in a strong cash position with cash and cash equivalents totalling £266m (H1 2021: £879m). Net debt before lease liabilities at this date totalled £226m (H1 2021: net cash before lease liabilities £385m). At 30 June 2022, the Group had a total of £170m in undrawn facilities.

In making their assessment of going concern, the Directors reviewed financial projections until 30 September 2023. Stress test scenarios were modelled to take into account severe but plausible impacts of a combination of the principal risks occurring simultaneously, as well as a reverse stress test.

 

Given the ongoing uncertainty in the macro-economic market, inflation, ongoing war in Ukraine and the global Covid-19 recovery, Management modelled stress tests across multiple scenarios. These included adjusting for decrease in revenue (both direct to consumer and business to business markets), increase in cost base across key inputs being commodity prices, utilities and payroll and the impact of a decline in working capital efficiency.  The results of stress testing demonstrated that the combination of mitigating actions available including existing cash resources, level of discretionary spend, working capital optimisation and ability to utilise the RCF were sufficient for the Group to withstand such impacts.

 

A reverse stress test was modelled to identify the point at which liquidity is exhausted. The model would have to see a significant decline in revenue and margins compared with the stress test set out above. Such a scenario, and the sequence of events which could lead to it, is considered to be extremely remote.

For these reasons, the Directors continue to adopt the going concern basis in preparing these condensed interim financial statements.

 

16  The asset will be subject to a sale and leaseback with a back to back sub-lease of part of the demise

 

 

Responsibility statement of the directors in respect of the condensed interim financial statements

 

We confirm that to the best of our knowledge:

·    the condensed set of financial statements for the half year ended 30 June 2022 has been prepared in accordance with UK adopted IAS 34 Interim Financial Reporting;

·      the interim management report includes a fair review of the information required by:

o  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the 2022 financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

a.     DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

 

Matthew Moulding                                                                                                                             John Gallemore

Chief Executive Officer                                                                                                                       Chief Financial Officer

14 September 2022                                                                                                                           14 September 2022

 

 

 

Interim condensed consolidated statement of comprehensive income for the six months ended 30 June 2022

 

		30 June 2022	30 June 2021
	Note	£'000	£'000
Revenue	2	1,076,762	958,830
Cost of sales		(634,221)	(521,418)
Gross profit		442,541	437,412
Distribution costs		(199,913)	(187,478)
Administrative costs		(331,824)	(267,327)
Operating loss		(89,196)	(17,393)
Finance income		792	112
Finance costs		(19,782)	(64,058)
Loss before taxation		(108,186)	(81,339)
Income tax credit/(charge)	4	1,835	(713)
Loss for the financial period		(106,351)	(82,052)
Other comprehensive expense:
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translating foreign operations, net of tax		76,201	(18,637)
Net gain on cash flow hedges		10,399	7,328
Total comprehensive expense for the financial period		(19,751)	(93,361)
Loss per share (£'s)
Basic		(0.09)	(0.08)
Diluted		(0.09)	(0.08)
Earnings before interest, taxation, depreciation, amortisation, impairment, adjusted items and share-based payment charges (Adjusted EBITDA)
		30 June 2022	30 June 2021
	Notes	£'000	£'000
Operating loss		(89,196)	(17,393)
Adjustments for:
Amortisation	6	52,319	41,445
Depreciation	6	45,732	28,554
Adjusted items	3	22,891	28,609
Share-based payments	5	573	-
Adjusted EBITDA*		32,319	81,215

^(*)Adjusted EBITDA is defined as operating loss before depreciation, amortisation, adjusted items and share-based payments. The results for the period are derived from continuing activities. The comprehensive expense is 100% attributable to the owners of the Parent Company.     

 

 

Interim condensed consolidated statement of financial position as at 30 June 2022

		30 June 2022	30 June 2021	31 December 2021 Audited
	Note	£'000	£'000	£'000
Non-current assets
Intangible assets	6	1,557,266	1,212,671	1,506,292
Property, plant and equipment	6	359,257	290,055	335,620
Right-of-use assets	6	319,799	274,990	310,282
Investments		1,400	-	1,400
		2,237,722	1,777,716	2,153,594
Current assets
Inventories		456,443	358,400	466,781
Trade and other receivables		267,508	263,622	263,929
Other financial assets		14,451	4,338	2,700
Cash and cash equivalents	7	265,661	878,549	536,827
		1,004,063	1,504,909	1,270,237
Total assets		3,241,785	3,282,625	3,423,831
Equity
Ordinary shares		6,808	6,684	6,684
Share premium		2,023,081	2,022,842	2,022,311
Merger reserve		615	615	615
Capital redemption reserve		523	523	523
Hedging reserve		(5,715)	(13,825)	(12,964)
Cost of hedging reserve		16,844	10,492	13,694
FX Reserve		75,107	(19,459)	(1,094)
Retained earnings		(379,782)	(217,993)	(274,015)
		1,737,481	1,789,879	1,755,754
Non-current liabilities
Borrowings		500,753	500,598	489,113
Derivative financial liabilities		-	39,914	-
Lease liabilities		316,681	281,395	305,831
Provisions	9	16,772	-	15,623
Deferred tax		70,695	70,218	73,766
		904,901	892,125	884,333
Current liabilities
Contract liability		39,314	41,227	36,143
Trade and other payables		493,338	507,262	676,563
Borrowings		1,346	3,421	752
Current tax liability		5,573	1,092	4,118
Lease liabilities		47,124	36,957	43,342
Other financial liabilities		10,008	10,039	21,943
Provisions	9	2,700	623	883
		599,403	600,621	783,744
Total liabilities		1,504,304	1,492,746	1,668,077
Total equity and liabilities		3,241,785	3,282,625	3,423,831

 

 

Interim condensed consolidated statement of changes in equity for the six months ended 30 June 2022

 

	Ordinary shares	Share premium		Merger reserve	Capital Redemption reserve		FX reserve		Hedging reserve	Cost of Hedging reserve	Retained earnings	Total equity
	£'000	£'000		£'000	£'000		£'000		£'000	£'000	£'000	£'000
Balance at 1 January 2022	6,684	2,022,311		615	523		(1,094)		(12,964)	13,694	(274,015)	1,755,754
Loss for the period	-	-		-	-		-		-	-	(106,351)	(106,351)
Other comprehensive expense:
Impact of foreign exchange	-	-		-	-		76,201		-	-	-	76,201
Movement on hedging instruments	-	-		-	-		-		7,249	3,150	-	10,399
Total comprehensive expense for the period	-	-		-	-		76,201		7,249	3,150	(106,351)	(19,751)
Issue of ordinary share capital	124	770		-	-		-		-	-	-	894
Share-based payments	-	-		-	-		-		-	-	573	573
Deferred tax effect in equity	-	-		-	-		-		-	-	11	11
Balance at 30 June 2022	6,808	2,023,081		615	523		75,107		(5,715)	16,844	(379,782)	1,737,481
Balance at 1 January 2021	6,061	1,287,171		615	523		(822)		(18,003)	7,342	(138,361)	1,144,526
Loss for the period	-	-		-	-		-		-	-	(82,052)	(82,052)
Other comprehensive expense:
Impact of foreign exchange	-	-		-	-		(18,637)		-	-	-	(18,637)
Movement on hedging instruments	-	-		-	-		-		4,178	3,150	-	7,328
Total comprehensive expense for the period	-	-		-	-		(18,637)		4,178	3,150	(82,052)	(93,361)
Issue of ordinary share capital	623	735,671		-	-		-		-	-	-	736,294
Deferred tax effect in equity	-	-		-	-		-		-	-	2,420	2,420
Balance at 30 June 2021	6,684	2,022,842		615	523		(19,459)		(13,825)	10,492	(217,993)	1,789,879